Investment Experts Applaud Lynch's Ideas
Former Magellan Fund manager relied partly on his family to guide him to companies whose stocks rose sharply
NEW YORK — `BEATING the Street," the new book on picking stocks by financial guru Peter Lynch, is winning plaudits from many financial experts as well as reviewers.
In addition to enjoying Lynch's sprightly and humorous writing, the experts praise Mr. Lynch for what they perceive to be his sound investment strategy - especially Lynch's contention that stock-pickers do best when they thoroughly research the equities they wish to buy, and think in terms of the long-haul. Lynch says that investors need not be dependent on mutual funds.
"Mr. Lynch's argument is solid," says Thomas O'Hara, chairman of the National Association of Investors Corporation (NAIC), Royal Oak, Mich. The NAIC is a national organization of individual investors. In his first chapter, Lynch notes that the majority of the 8,000 investor clubs of the NAIC consistently beat market averages, as measured by such indexes as the Standard & Poor's 500.
"It's the high-powered stuff [i.e., using computer screens to locate good stocks, or relying on complicated investment strategies such as hedging], that gets an investor in trouble," Mr. O'Hara says. "Last year 69 percent of our members equalled or exceeded the S&P 500. They did that by finding good companies and taking a long-term strategy."
Under Lynch's leadership, Fidelity Investment's Magellan Fund, which he headed up from 1977 to 1990, became the top-ranked equity mutual fund in the United States. His new book, written along with John Rothchild, a financial writer, is expected to be the top-selling US book on personal investing this year.
Lynch believes in thoroughly understanding the company whose stock you want to own. But understanding that company, he argues, starts with personal experience. In his case, he would often let his family guide him to promising companies. He laments not having purchased Clearly Canadian, a soft drink company listed on Canadian exchanges, even though his children liked to buy the company's carbonated bottle products. After the company went public in 1991, the stock price shot from $3 to $26.75 a share. He a lso missed out on Chili's restaurants, a food chain specializing in Southwestern foods, even though his daughters liked to wear sweatshirts bearing the Chili name. But on a shopping trip he let his family direct him to their favorite stores, one of which was "The Body Shop," a British cosmetics retailer that has turned out to be a big winner for investors.
"Lynch is correct in relying on personal experience," says Arnold Kaufman, editor of The Outlook, a financial review published by Standard & Poor's Corporation. "You are better off buying stock in a local company that you thoroughly understand."
If you can, Mr. Kaufman advises, socialize with the company's management; get to know truck drivers or workers; read everything you can about the firm, especially its financial statements.
Dennis Jarrett, chief technical analyst for Kidder, Peabody & Co., also likes Lynch's argument that an investor should avoid the crowd - that is, refrain from following the lead of thousands of other investors who are frantically rushing out to buy a particular stock. "Buy when something is slightly out of favor," he says.
"You don't need a massive computer data bank to find good stocks, but you do have to keep working at your research," says Larry Wachtel, a vice president with Prudential Securities Inc. "But there are some problems with Mr. Lynch's approach," Mr. Wachtel adds.
"If you don't have the inclination to bird-dog a company, the [do-it-yourself] approach can be dangerous."
While liking Lynch's sprightly writings and efforts to educate the public, Peggy Farley, chief executive officer of AMAS Securities Inc., says that many - if not most - investors will never really have the time nor expertise to stay totally abreast of the market. AMAS is an investment advisory firm. Ms. Farley maintains that most investors are better off over time using a professional investment adviser, given the increasing complexity of financial markets.
Some experts, such as Mr. Kaufman, of Standard & Poors, say that Lynch's approach puts too much emphasis on common stocks, at the expense of considering alternative investments, such as bonds.
Merton Miller, a professor of finance at the University of Chicago, goes a step farther. He says that books such as "Beating the Street" are essentially "entertainment," rather than serious scholarship about financial markets.